I. Forex Trading Strategy 1
This forex trading strategy is suitable for relatively large trading ranges between 150-300 points. When the market moves towards the resistance line, the bulls will encounter significant resistance at or just above the resistance level.
The market behaves this way because, at this moment, some major banks and financial institutions enter the market, selling strongly at this position, making the sellers’ strength greater than the buyers’. As a result, prices begin to fall.
During consolidation periods, traders generally expect to sell at or above resistance levels.
Successful traders will usually check their trading toolbox to see what tools are available to help them confirm their decision to sell. When market prices approach resistance levels, most traders will look at shorter time frames and search for bearish candlestick patterns near the highs.
Once a bearish candlestick pattern appears, they will short-sell without hesitation according to the candlestick trading rules. This is because the bearish candlestick pattern further confirms that the market may undergo a U-shaped reversal. After placing a short order, they will switch to longer time frames to look for support levels within the consolidation range and hold the short position until the price approaches the support level before closing the position.
When the price starts to fall and approaches the support level, those large banks and financial institutions will enter the market again, as this time there are more buyers than sellers, and the market may turn from a bear market to a bull market.
If the consolidation pattern is still valid, the market price will undergo a U-shaped reversal again and gradually start to rise. When the market price approaches another support level, traders will enter the state again.
They will start looking for bullish candlestick patterns near the support level or significantly lower levels to support their decision to buy. Once a bullish pattern appears, they will enter the market to go long according to the candlestick trading rules and funds management principles.
The bullish candlestick pattern confirms that the market is about to undergo a U-shaped reversal. At this point, traders need to turn to longer time frames to find where the current resistance level is and hold the long position until the market price approaches the resistance level. Traders can continuously repeat the above two trading processes for weeks or even months until the market breaks through the consolidation range.
If you follow this approach, once you identify and confirm a consolidation pattern, it will be difficult to be hurt by such a market situation, as long as you have enough patience to wait for a bearish candlestick pattern to appear near the resistance level and a bullish candlestick pattern to appear near the support level.
The beauty of waiting for candlestick patterns to appear during a consolidation market is that when the market chooses to break through the consolidation range, those candlestick patterns usually do not appear (see the chart below).
This makes trading much simpler! When you find that the market is in a consolidation state, you just need to sell near the resistance level and buy near the support level.
II. Forex Trading Strategy 2
This forex trading strategy, known as “Straddle Arbitrage,” is designed for narrow-range fluctuations that occur in the market while awaiting the release of fundamental data. An important premise for using this strategy is that the market is about to release fundamental data, and the market’s volatility is between 20-60 points at that time.
In other words, the more tangled the market’s consolidation trend before the release of forex fundamental data, the more effective the execution of straddle arbitrage and the greater the opportunity. Generally, the longer the market stays in a consolidation range, the more violent the market’s outbreak will be (see the chart below).
Before the release of fundamental data, if you confirm that the market has entered a consolidation trend, you should switch to a shorter time frame, such as the 30-minute chart. Hang your straddle arbitrage orders 5 minutes before the data is released. Specifically, place a buy order 15 points above the resistance level or trading range, and a sell order 10 points below the support level or trading range.
Why hang the buy order 15 points higher and the sell order 10 points lower? This is because there is a spread of 3-5 points between the selling and buying prices of all currencies. Usually, the stop-loss for short positions is also placed about 15 points above the recent high, and the stop-loss for long positions is placed about 10 points below the recent low.
The reason for placing the long order about 15 points above the recent high is that traders often check the bid list, which reflects the selling price at a specific moment. Since there is a difference between the selling and buying prices, we need to add an extra 5 basis points to compensate for this difference. This is mainly to prevent you from being passively entered into the market too early due to the spread.
Even so, you should be aware that if the potential loss is more than what you might get, such a trading opportunity in a consolidation trend should be abandoned. Always remember, the market can break in any direction.
Another very important point is that for trades in two different directions, you should formulate two different trading plans, including entry points, stop-losses, and TP. It is also necessary to mentally rehearse the market trend.
You must remember that the market can run upwards as well as downwards. If the market falls, you should then look for previous support levels and choose TP before the bear market exhausts and starts to pull back. Conversely, if the long position is executed first, then you should look for resistance levels and choose TP before the bull market exhausts.
The bull market will also have a pullback after reaching new highs.
III. Don’t Forget to Check Forex Fundamental Data
When determining whether the market is in a consolidation phase, the primary principle is to check if there are any fundamental data releases expected in the near future. You can check the news data released at any time on Dailyfx.
Since the forex market is open 24 hours, consolidation phases are common, especially during the latter part of the afternoon when trading is relatively quiet. In such cases, the simplest strategy is to continue trading in the direction of the prevailing trend.
Don’t make the same mistake as my student Roger, who assumed the market was in a consolidation phase without checking for any upcoming fundamental data releases. Let’s share his experience.
Roger returned to the classroom to tell us about the devastating outcome of using straddle arbitrage during a market consolidation phase. He was so excited that day, he even told his wife to get ready for a big dinner out in the city to celebrate.
He had placed straddle arbitrage orders in the market, and the market had executed his orders just as he had hoped. After the orders were filled, he excitedly shouted to his wife, “Hurry up, dear, pour me a glass of champagne. Tonight is a great day, let’s forget everything else and enjoy the luxury.”
However, suddenly, the market made a U-turn, and the price fell back into the consolidation range and started moving in the opposite direction. “I was so thrilled when I saw the consolidation pattern, all I could think about was how much I would make after the breakout, so much so that I forgot the two most important things—I didn’t check if there were any fundamental data releases, nor did I set a protective stop-loss for my orders,” he said.
“About an hour later, the market had moved 60 points against the direction of my orders, and I had two positions open. At that moment, I realized I had lost $1,200. Just then, my wife came downstairs, dressed and holding champagne, ready for dinner,” he continued.
He looked at her blankly, snatched the champagne bottle from her hand, took a big gulp, and sheepishly asked, “Where are you going?” The classroom erupted in laughter. Perhaps it’s only through such painful experiences that we truly pay attention to the details.
I have now deeply understood that the feeling of being outside the trade but wishing to be in it is much better than being in the trade and wishing to be out.
If you sense a forex consolidation pattern forming, be sure to check immediately if there are any forex fundamental data releases, and then decide whether to participate in this market opportunity. If you find there are no fundamental data releases, continue to trade in the direction of the current trend.
If you forget to check the two important principles mentioned above, you might fall into what’s known as a “bull trap” or a “bear trap.”
